Imagine pocketing checks from an investment throwing off 7% interest.
It's not easy to picture in today's low-interest environment with saving accounts paying less than 1% and the S&P 500 carrying a dividend yield just under 2%.
Now, imagine pocketing dividends from a company yielding 7% with rock-solid business income all but backed by, and coming directly from, the federal government.
Hard to believe, but an investment like this exists. Around the time that I first told Dividend Opportunities readers about the company last month, one person was so excited about it, he was inspired to email me this question:
'I was recently reading about Government Properties Income Trust (NYSE: GOV). With monthly income plus special tax preference, it seems almost like a no-lose stock. Is it too good to ignore?' -- David K.
I wouldn't call it a 'no-lose' proposition, but GOV is definitely worthy of consideration.
As the name implies, Government Properties Income Trust owns buildings that are leased to state and federal government agencies. The company owns 82 properties from New York to California that hold more than 10 million square feet of rentable space. Virtually all (94%) of the income generated by these buildings comes from the U.S. government, 10 state governments, and the United Nations.
Just to be clear, GOV itself is not a government agency, nor are its dividends implicitly backed by the government. This is just an ordinary company that has some rather extraordinary tenants: the Social Security Administration, the FBI, the Department of Energy, the Food and Drug Administration and the Department of the Interior.
All of these agencies (and a few dozen more) rent space from Government Properties Trust. Even the Internal Revenue Service pays rent to GOV. So if you're tired of sending money to the IRS, this is one way to turn the tables and have them write checks to you.
As I've said before, there are some perks to being Uncle Sam's landlord. Compared with typical retail and office tenants, government agencies are more stable (less chance of default) and tend to stick around longer (more likely to renew leases). On average, they remain in the same spot for 26 years, dutifully sending in rent checks every month.
Now, that doesn't mean that the company is immune to trouble. For example, defense cutbacks have taken a toll in Washington, D.C., where occupied office space has dropped by more than 1.5 million square feet. That's the biggest decline among the nation's metro markets.
Still, GOV is in fine financial shape, with an investment-grade balance sheet and manageable debt (3.5 times annual EBITDA (earnings before interest, taxes, depreciation and amortization)). And the firm's portfolio is 93.4% occupied, with an average remaining lease term of 5.4 years. Those properties are throwing off enough income to support a nice 7.1% dividend yield.
Funds from operations have been running about 125% of dividends, which means the company is comfortably generating $1.25 in cash for every dollar distributed to stockholders. That's a nice margin of safety.
All in all, this 7% dividend payout is well supported by a stable income stream. And 13 new properties acquired last year are earning even more (about 8.2%). I want to see how the ongoing budget situation plays out in Washington, but consider GOV a solid buy at this price and a strong contender for my High-Yield Investing portfolio.
Good Investing!
-- Nathan Slaughter
